What does war mean for the USA economy?

The war means for the USA economy


The Second
World War was a global conflict that ushered in significant changes in global
politics. Prior to 1939, Europe was the most influential and dictating force in
global affairs. After 1945, the Second World War aided in bringing about
profound changes in world politics. For several reasons, both the Soviet Union
and the United States remained preoccupied with national growth at the cost of
any substantial global involvement.

The conflict propelled the Soviet Union and the
United States militarily and politically deep into Europe, transforming their
relationship. This change was quickly replicated in their relationship outside
of Europe, where different clashes arose. The Cold War, like the Second World
War, began in Europe but swiftly expanded over the world, with significant
effects on countries and people everywhere.

Several hostilities/wars between “client nations” of the USSR and the USA occurred during the Cold War, which began
in 1945 and ended with the collapse of the Soviet Union in December 1991.

When Iraq
invaded Kuwait on August 2, 1990, well before the Soviet Union collapsed, a new
age of hostility began. The idea of “The Clash of Civilization” by Samuel P. Huntington provided a foundation to invent a post-Cold War useful enemy.

And we have
seen that the new enemy (Islamic World in general and Arab World in particular)
provided justification for its continued hegemony in a post-Soviet world. The
global political agenda of the USA is rooted in its domestic economic

War as a means of
protecting the system

Capitalism, as an economic system has a horrifying past due to its inherent phenomenon of business cycles. However, fears of a recurrence of “Black October of 1929,” which triggered
the great depression of the 1930s, have not been completely wiped out. Arthur Okun,
one of the leading analysts of business cycles, viewed business cycles as

Recessions are
now generally considered to be fundamentally preventable like airplane
crashes and unlike hurricanes. But we have not banished air crashes from the
land, and it is not clear that we have the wisdom or the ability to eliminate
recession. The danger has not disappeared. The forces that produce recurrent
recession are still in the wings, merely waiting for their cue.”

After World War II, reflecting both the
increasing influence of Keynesian views and the fear of another depression,
Congress formally proclaimed federal responsibility for macroeconomic
performance. It enacted the landmark Employment Act of 1946, which stated:

“The Congress hereby declares that it is the
continuing policy and responsibility of the federal government to use all
practicable means consistent with its needs and obligations….to promote
maximum employment, production, and purchasing power.”

In the following paragraph, we will read how
wisely the US managed to prevent its economy from recessions. Impact of defense
spending on the US economy

The government expenditure multiplier at work
is seen in the economic impact of the US defense budget. In early 1980
the United States undertook a tremendous expansion of defense spending under
President Regan. The defense budget (in constant dollars) soured from $ 271
billion in 1979 to $ 409 billion in 1987, when it reached 7.5 percent of the
GDP. After that peak, defense spending as a share of GDP started drifting down.

Reductions in
military spending and the 1990s recession

The cuts in defense spending accelerated
beginning in 1990 when it became clear that the cold war was finally over, and
Soviet communism was no longer a military danger. President Bush and President
Clinton both proposed budgets calling for further reductions in military
spending, and by the mid-1990s defense spending had declined to under 5 percent of the GDP.

According to the multiplier theory, the defense
build-up of the early 1980s should have exerted a strong stimulative impact on
the economy, and that is exactly what happened. As defense spending rose, it
helped pull the country out of the recession of 1981-82 and helped propel the
boom of the mid-1980s. To some regions like Southern California, where many
aerospace companies were based, the influx of defense dollars brought
tremendous prosperity. A newspaper article noted that one well-paid defense job
would spin-off other jobs, such as “the metal shop supplying some specialized
parts, the cleaners to keep the jumpsuits white, and the paper company making
the pasteboard boxes for the doughnuts that someone picks up on the way to the

The multiplier was reversed at the conclusion
of the Cold War. As defense spending fell, it became a drag on the economy as a
whole. Cuts to defense spending led to the slow rise of output in the early
1990s. For example, between 1990 and 1993, the aircraft manufacturing business
lost 170,000 jobs, primarily due to defense budget cuts. Southern California,
which had profited from defense spending a decade before, ended up being in
recession for far longer than the rest of the country, as Pentagon layoffs
showed an increase in that region.

The Vietnam War
began in 1965 and continued until 1975. From 1965 to 1973, the American economy
grew by an average of 4.2 percent; even after accounting for the negative
growth in 1974-75 (-0.6 percent and -0.4 percent, respectively), the US economy
grew by 3.7 percent on average and without a major recessionary tendency.

Before the
first invasion of Iraq, the state of the US economy

The American economy entered a recession in the
third quarter of 1990, with GDP growing at a negative 0.7%. On the other hand,
Iraq invaded Kuwait on August 2, 1990, and operations Desert Shield began on
August 7, 1990. The United States economy emerges from recession in the first
quarter of 1991, and a cease-fire is declared on April 11th, 1991.

The American economy entered a recession in
2001, with negative GDP growth of -0.6 percent, -1.6 percent, and -0.3 percent
in the first, second, and third quarters, respectively. However, in the final
month of the third quarter, 9/11 occurred, resulting in enormous military attacks
on both Afghanistan and Iraq. As a result, the American economy rose from 2.7
percent growth in the fourth quarter of 2001 to 7.1 percent growth in the third
quarter of 2003.

Another oddity of the American economy is that
the trade deficit actually helped its economic and financial markets. As the
deficit grew, so did the country’s prosperity. A growing deficit meant an
ever-increasing hoard of cash in foreign hands; individuals in other countries
didn’t know what to do with all that money. The dollar was immediately
re-invested in American assets by foreign governments or central banks, US
interest rates plummeted, and a virtuous circle initiated by the Japanese stock
market disaster in 1990 became a gusher. In 1997, Asian currencies plummeted,
causing a significant increase in America’s already enormous trade deficit.
However, this benefited the US because a larger inflow of foreign capital meant
further lower interest rates.

A housing bubble is fueled by falling borrowing
rates, and when a person buys a house, he also wants to buy appliances,
furniture, paintings, and rugs, among other things. As a result, a housing boom
is the best thing that can happen to the economy.

The statistics
show that Current Account Deficit (CAD) and Net Capital Inflow (NCI) have a
substantial negative link (correlation coefficient -79 percent), as CAD further
widens the NCI increases. Countries with a surplus in their trade balance invest
funds back into American assets. The infusion of foreign investment into
American assets, on the other hand, is lowering interest rates. The negative
correlation coefficient between mortgage rates and Net Capital Inflow is -68
percent. It means that as Net Capital Inflow rises, interest rates fall.
Current account balance, net, capital inflow, and mortgage rates


It is in the United States’ best interests to have a pretext to
intervene militarily in order to protect its war machine business. The economy is
like a wheel within a wheel; as the larger wheel begins to move, the other
wheels follow suit. As a result, bloodshed committed in the name of the Cold War
or terrorism greases the wheels of the American economy.

On the other
hand, as we’ve seen, removing trade barriers is in the US’s best interests.
Regardless of the size of its current account deficit.

However, war is
frequently employed as a last resort to prevent worsening economic conditions
or currency crises, notably by boosting military services and employment while
depopulating sectors of the population to free up resources and restore
economic and social order. A transitory war economy might also be viewed as a
way to avert more permanent militarization. President Franklin D. Roosevelt of
the United States declared during World War II that if the Axis powers
triumphed, “we would have to turn ourselves permanently into a
militaristic power on the basis of war economics.”

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